**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**








**FORM
      10-Q**





(Mark
      One)




(X)
            QUARTERLY
              REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
              OF
              1934




For
      the
      thirty-nine weeks ended September
      30, 2006




(
              )
            TRANSITION
              REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
              OF
              1934




For
      the
      transition period from _______to _______






Commission
      File Number 1-5084





**TASTY
      BAKING COMPANY**


(Exact
      name of Company as specified in its charter)





Pennsylvania
              23-1145880(State
                  of Incorporation)
              (IRS
                  Employer Identification
                  Number)






**2801
      Hunting Park Avenue, Philadelphia, Pennsylvania 19129**


(Address
      of principal executive offices including Zip Code)





**215-221-8500**


(Company's
      telephone number, including area code)







Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
      the
      preceding 12 months (or for such shorter period that the registrant was required
      to file such reports), and (2) has been subject to such filing requirements
      for
      the past 90 days.  YES _X_   
      NO__






Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer. See definition of “accelerated
      filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
      one):


Large
                Accelerated Filer [ ]
            Accelerated
                Filer [X]
            Non-accelerated
                Filer [ ]






Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act).


YES __   
      NO X_








There
      were
      8,215,261 shares of Common Stock outstanding as of November 1,
      2006.











**TASTY
      BAKING COMPANY AND SUBSIDIARIES**








**INDEX**











PART
              I.
            FINANCIAL
              INFORMATIONItem
              1.
            Financial
              Statements (Unaudited)Consolidated
              Balance SheetsSeptember
              30, 2006 and December 31,
              2005
            3Consolidated
              Statements of OperationsThirteen
              and Thirty-nine weeks ended September 30, 2006
              and September 24, 2005
            4Consolidated
              Statements of Cash FlowsThirty-nine
              weeks ended September 30, 2006 and September
              24, 2005
            5Notes
              to Consolidated Financial Statements
            6-16Item
              2.
            Management's
              Discussion and Analysis of
              FinancialCondition
              and Results of Operations
            17-20Item
              3.
            Quantitative
              and Qualitative DisclosuresAbout
              Market Risk
            21Item
              4.
            Controls
              and Procedures
            21PART
              II.
            OTHER
              INFORMATIONItem
              1.
            Legal
              Proceedings
            23Item
              1A.
            Risk
              Factors
            23Item
              2.
            Unregistered
              Sales of Equity Securities and Use
              of Proceeds
            23Item
              6.
            Exhibits
            24Signature
            
            25








2




**PART
        I. FINANCIAL INFORMATION**


**Item
        1.** **Financial
        Statements**


**TASTY
                  BAKING COMPANY AND
                  SUBSIDIARIES****CONSOLIDATED
                  BALANCE SHEETS**(Unaudited)(000's)**September
                  30, 2006**
              
              **December
                  31, 2005****Assets****Current
                  assets:**Cash
              
              $
              146
              
              $
              251Receivables,
                  less allowance of$2,675
                  and $3,272, respectively
              
              
              20,404
              
              
              18,389Inventories
              
              
              6,479
              
              
              6,472Deferred
                  income taxes
              
              
              2,127
              
              
              2,127Prepayments
                  and other
              
              
              2,073
              
              
              1,769Total
                  current assets
              
              
              31,229
              
              
              29,008**Property,
                  plant and equipment:**Land
              
              
              1,433
              
              
              1,433Buildings
                  and improvements
              
              
              43,051
              
              
              42,282Machinery
                  and equipment
              
              
              139,541
              
              
              136,392184,025
              
              
              180,107Less
                  accumulated depreciation
              
              
              118,388
              
              
              113,85965,637
              
              
              66,248**Other
                  assets:**Long-term
                  receivables from independent sales distributors
              
              
              10,834
              
              
              10,700Deferred
                  income taxes
              
              
              13,162
              
              
              13,251Other
              
              
              2,047
              
              
              2,10026,043
              
              
              26,051**Total
                  assets**
              
              $
              122,909
              
              $
              121,307**Liabilities****Current
                  liabilities:**Current
                  obligations under capital leases
              
              $
              448
              
              $
              534Notes
                  payable, banks
              
              
              631
              
              
              631Book
                  overdraft
              
              
              2,879
              
              
              3,482Accounts
                  payable
              
              
              4,612
              
              
              3,934Accrued
                  payroll and employee benefits
              
              
              6,955
              
              
              6,810Reserve
                  for restructures
              
              
              25
              
              
              247Other
              
              
              6,656
              
              
              3,734Total
                  current liabilities
              
              
              22,206
              
              
              19,372Long-term
                  obligations under capital leases, less current portion
              
              
              223
              
              
              534Long-term
                  debt
              
              
              21,435
              
              
              22,558Accrued
                  pensions and other liabilities
              
              
              24,571
              
              
              24,599Postretirement
                  benefits other than pensions
              
              
              15,715
              
              
              16,955**Total
                  liabilities**
              
              
              84,150
              
              
              84,018**Shareholders'
                  equity**Common
                  stock
              
              
              4,558
              
              
              4,558Capital
                  in excess of par value of stock
              
              
              28,978
              
              
              28,910Retained
                  earnings
              
              
              23,837
              
              
              22,47257,373
              
              
              55,940Less:Accumulated
                  other comprehensive loss
              
              
              6,251
              
              
              6,287Treasury
                  stock, at cost
              
              
              12,363
              
              
              11,912Stock
                  compensation arrangements, receivables and deferrals
              
              
              -
              
              
              452Total
                  shareholders' equity
              
              
              38,759
              
              
              37,289**Total
                  liabilities and shareholders' equity**
              
              $
              122,909
              
              $
              121,307See
                  Notes to Consolidated Financial
                  Statements.




3


**TASTY
                    BAKING COMPANY AND
                    SUBSIDIARIES****CONSOLIDATED
                    STATEMENTS OF OPERATIONS**(Unaudited)(000's,
                    except per share amounts)**For
                    the Thirteen Weeks Ended**
                
                **For
                    the Thirty-Nine Weeks Ended****September
                    30, 2006**
                
                **September
                    24, 2005**
                
                **September
                    30, 2006**
                
                **September
                    24, 2005****Gross
                    sales**
                
                $
                66,033
                
                $
                69,371
                
                $
                203,275
                
                $
                204,897Less
                    discounts and allowances
                
                
                (24,705
                )
                
                (26,947
                )
                
                (76,476
                )
                
                (77,588
                )Net
                    sales
                
                
                41,328
                
                
                42,424
                
                
                126,799
                
                
                127,309**Costs
                    and expenses:**Cost
                    of sales
                
                
                26,035
                
                
                28,475
                
                
                78,454
                
                
                81,625Depreciation
                
                
                1,633
                
                
                1,444
                
                
                4,801
                
                
                4,906Selling,
                    general and administrative
                
                
                12,816
                
                
                12,014
                
                
                39,179
                
                
                38,195Interest
                    expense
                
                
                372
                
                
                334
                
                
                1,159
                
                
                981Other
                    income, net
                
                
                (247
                )
                
                (314
                )
                
                (820
                )
                
                (794
                )40,609
                
                
                41,953
                
                
                122,773
                
                
                124,913Income
                    before provision forincome
                    taxes
                
                
                719
                
                
                471
                
                
                4,026
                
                
                2,396**Provision
                    for income taxes**
                
                
                213
                
                
                160
                
                
                1,431
                
                
                720**Net
                    income**
                
                $
                506
                
                $
                311
                
                $
                2,595
                
                $
                1,676**Average
                    common shares outstanding:**Basic
                
                
                8,041
                
                
                8,053
                
                
                8,048
                
                
                8,058Diluted
                
                
                8,224
                
                
                8,156
                
                
                8,242
                
                
                8,161**Per
                    share of common stock:**Net
                    income:Basic
                
                $
                0.06
                
                $
                0.04
                
                $
                0.32
                
                $
                0.21Diluted
                
                $
                0.06
                
                $
                0.04
                
                $
                0.31
                
                $
                0.21Cash
                    dividend
                
                $
                0.05
                
                $
                0.05
                
                $
                0.15
                
                $
                0.15See
                    Notes to Consolidated Financial
                    Statements.




4


**TASTY
                  BAKING COMPANY AND
                  SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF CASH FLOWS**(Unaudited)(000's)**For
                  the Thirty-Nine Weeks Ended****September
                  30, 2006**
              
              
              **September
                  24, 2005 (a**)******Cash
                  flows from (used for) operating activities**Net
                  income
              
              $
              2,595
              
              $
              1,676Adjustments
                  to reconcile net income to netcash
                  provided by operating activities:Depreciation
              
              
              4,801
              
              
              4,906Gain
                  on sale of routes
              
              
              (6
              )
              
              (93
              )Restructure
                  payments
              
              
              (222
              )
              
              (459
              )Defined
                  benefit pension (benefit) expense
              
              
              (9
              )
              
              95Defined
                  contribution pension expense
              
              
              1,608
              
              
              1,168Pension
                  contributions
              
              
              -
              
              
              (5,300
              )Deferred
                  taxes
              
              
              50
              
              
              (124
              )Post
                  retirement medical
              
              
              (1,240
              )
              
              18Other
              
              
              304
              
              
              226Changes
                  in assets and liabilities:(Increase)
                  in receivables
              
              
              (2,384
              )
              
              (2,732
              )(Increase)
                  in inventories
              
              
              (7
              )
              
              (2,085
              )(Increase)
                  in prepayments and other
              
              
              (97
              )
              
              (15
              )Increase
                  in accrued taxes
              
              
              1,020
              
              
              546Increase
                  (decrease) in accounts payable, accruedpayroll
                  and other current liabilities
              
              
              (270
              )
              
              (3,424
              )**Net
                  cash provided from (used for) operating
                  activities**
              
              
              6,143
              
              
              (5,597
              )**Cash
                  flows from (used for) investing activities**Proceeds
                  from sale of property, plant and equipment
              
              
              75
              
              
              43Purchase
                  of property, plant and equipment
              
              
              (4,462
              )
              
              (3,135
              )Proceeds
                  from independent sales distributor loan repayments
              
              
              3,179
              
              
              2,991Loans
                  to independent sales distributors
              
              
              (2,945
              )
              
              (2,921
              )Keystone option receipt
              
              
              1,600
              
              
              -Other
              
              
              (181
              )
              
              (145
              )**Net
                  cash used for investing activities**
              
              
              (2,734
              )
              
              (3,167
              )**Cash
                  flows from (used for) financing activities**Dividends
                  paid
              
              
              (1,230
              )
              
              (1,225
              )Payment
                  of long-term debt
              
              
              (1,521
              )
              
              (513
              )Net
                  decrease in short-term debt
              
              
              -
              
              
              (2,347
              )Increase
                  in long-term debt
              
              
              -
              
              
              11,747Net
                  increase (decrease) in book overdraft
              
              
              (604
              )
              
              1,030Purchase
                  of treasury stock
              
              
              (159
              )
              
              (93
              )**Net
                  cash from (used for) financing activities**
              
              
              (3,514
              )
              
              8,599**Net
                  decrease in cash**
              
              
              (105
              )
              
              (165
              )Cash,
                  beginning of year
              
              
              251
              
              
              320Cash,
                  end of period
              
              $
              146
              
              $
              155**Supplemental
                  Cash Flow Information**Cash
                  paid during the period for:Interest
              
              $
              1,225
              
              $
              950Income
                  taxes
              
              $
              38
              
              $
              79(a)
                  Amounts have been reclassified for comparative purposes.See
                  Notes to Consolidated Financial
                  Statements.




5




**NOTES
      TO CONSOLIDATED FINANCIAL
      STATEMENTS**


(000’s,
      except share and per share amounts)


All
      disclosures are pre-tax, unless otherwise noted.





**1.** **Summary
      of Significant Accounting Policies**





***Nature
      of the Business***


Tasty
      Baking Company is a leading producer of sweet baked goods and one of the
      nation’s oldest and largest independent baking companies, in operation since
      1914. It has two manufacturing facilities, one in Philadelphia, PA, and a second
      in Oxford, PA.





***Fiscal
      Year***


The
      company and its subsidiaries operate on a 52-53 week fiscal year, ending on
      the
      last Saturday of December. Fiscal year 2006 is a 52-week year. Fiscal 2005
      was a
      53-week year.





***Basis
      of Consolidation***


The
      consolidated financial statements include the accounts of the company and its
      subsidiaries. Inter-company transactions are eliminated.





***Interim
      Financial Information***


In
      the
      opinion of management, the accompanying unaudited consolidated financial
      statements contain all adjustments, consisting only of normal and recurring
      adjustments, necessary to present fairly the financial position of the company
      as of September 30, 2006, the results of its operations for the thirteen and
      thirty-nine weeks ended September 30, 2006 and September 24, 2005, and cash
      flows for the thirty-nine week period ended September 30, 2006 and September
      24,
      2005. These unaudited consolidated financial statements should be read in
      conjunction with the consolidated financial statements and footnotes thereto
      in
      the company’s Annual Report on Form 10-K for the fiscal year ended December 31,
      2005. In addition, the results of operations for the thirteen and thirty-nine
      weeks ended September 30, 2006 are not necessarily indicative of the results
      to
      be expected for the full year.





***Use
      of Estimates***


Certain
      amounts included in the accompanying consolidated financial statements and
      related footnotes reflect the use of estimates based on assumptions made by
      management. These estimates are made using all information available to
      management, and management believes that these estimates are as accurate as
      possible as of the dates and for the periods that the financial statements
      are
      presented. Actual amounts could differ from these estimates. Significant
      estimates for the company include customer discounts and allowances, long-lived
      asset impairment, pension, employee insurance and postretirement plan expense,
      workers’ compensation expense and income tax valuation.





***Concentration
      of Credit*****


The
      company encounters, in the normal course of business, exposure to concentrations
      of credit risk with respect to trade receivables. Ongoing credit evaluations
      of
      customers’ financial conditions are performed and, generally, no collateral is
      required. The company maintains reserves for potential credit losses and such
      losses have not exceeded management’s expectations.





***Revenue
      Recognition***


Revenue
      is
      recognized when title and risk of loss pass, which is upon receipt of goods
      by
      the independent sales distributors, retailers or third-party distributors.
      For
      route area sales, the company sells to independent sales distributors who,
      in
      turn, sell to retail customers. Revenue for sales to independent sales
      distributors is recognized upon receipt of the product by the distributor.
      For
      sales made directly to a retail customer or a third-party distributor, revenue
      is recognized upon receipt of the products by the retail customer or third-party
      distributor.





***Sale
      of Routes***


Sales
      distribution routes are owned by independent sales distributors who purchase
      the
      exclusive right to sell and distribute Tastykake products in defined
      geographical territories. When the company sells routes to independent sales
      distributors, it recognizes a gain or loss on the sale. Routes sold by the
      company are either existing routes that the company has previously purchased
      from an independent sales distributor or newly established routes in new
      geographies. Any gain or loss recorded by the company is based on the difference
      between the sales price and the carrying value of the route, and is recorded
      as
      a separate line item in the consolidated statements of operations. Any potential
      impairment of net carrying value is reserved as identified. The company
      recognizes gains or losses on sales of routes because all material services
      or
      conditions related to the sale have been substantially performed or satisfied
      by
      the company as of the date of sale. In most cases, the company will provide
      financing for a portion of the purchase price with interest bearing notes.
      Interest rates on the notes are based on treasury yields plus a spread. The
      notes require full repayment of the loan amount. The company has no obligation
      to later repurchase a route but may choose to do so to facilitate a change
      in
      route ownership.





6




***Cash
      and Cash Equivalents***


The
      company considers all investments with an original maturity of three months
      or
      less on their acquisition date to be cash equivalents. Book overdrafts are
      recorded within current liabilities. Cash flows associated with book overdrafts
      are classified as financing activities. During 2005, the company revised the
      classification for book overdrafts in the Consolidated Balance Sheet and the
      Consolidated Statements of Cash Flows. They were previously reported as an
      operating activity. The revised classifications have also been reflected in
      the
      comparative prior year amounts for purposes of consistency.





***Inventory
      Valuation***


Inventories,
      which include material, labor and manufacturing overhead, are stated at the
      lower of cost or market, cost being determined using the first-in, first-out
      (“FIFO”) method. Inventory balances for raw materials, work in progress, and
      finished goods are regularly analyzed and provisions for excess and obsolete
      inventory are recorded, if necessary, based on the forecast of product demand
      and production requirements.





Spare
      parts, which are recorded as property, plant and equipment, are valued using
      a
      moving average method and are reviewed for potential obsolescence on a quarterly
      basis. Reserves are established for all spare parts that are no longer usable
      and have no fair market value to the company.




***Property
      and Depreciation***


Property,
      plant and equipment are carried at cost. Depreciation is computed by the
      straight-line method over the estimated useful lives of the assets. Buildings
      and improvements are depreciated over thirty-nine years. Machinery and equipment
      are depreciated over a range of seven to fifteen years. Vehicles are depreciated
      over a range of five to ten years. Spare parts are capitalized as part of
      machinery and equipment and are expensed as utilized or capitalized as part
      of
      the relevant fixed asset. Capitalized computer hardware and software is
      depreciated over five years.




Costs
      of
      major additions, replacements and improvements are capitalized, while
      maintenance and repairs which do not improve or extend the life of the
      respective assets are expensed as incurred.





For
      significant projects, the company capitalizes interest and labor costs
      associated with the construction and installation of plant and equipment and
      significant information technology development projects.





In
      accordance with Statement of Financial Accounting Standard No.144, “Accounting
      for the Impairment or Disposal of Long-Lived Assets ”, long-lived
      assets are reviewed for impairment at least annually and whenever events or
      changes in circumstances indicate that the carrying amount may not be
      recoverable. In instances where the carrying amount may not be recoverable,
      the
      review for potential impairment utilizes estimates and assumptions of future
      cash flows directly related to the asset. For assets where there is no plan
      for
      future use, the review for impairment includes estimates and assumptions of
      the
      fair market value of the asset, which is based on the best information available
      to the company. These assets are recorded at the lower of their book value
      or
      fair market value.





The
      Financial Accounting Standards Board Interpretation 47, “Accounting for
      Conditional Asset Retirement Obligations,” requires the company to recognize
      liabilities for obligations related to asset retirement activities in which
      the
      timing and (or) method of settlement are conditional on a future event when
      it
      can reasonably estimate the fair value of each conditional asset retirement
      obligation. In December 2005, the company purchased from its Pension Plan the
      Philadelphia production facility (the “Hunting Park Bakery”), which contains
      asbestos. The Company is not under any current obligation to remove the asbestos
      since it is encased and in compliance with current regulatory codes. The company
      may have an obligation to remove the asbestos if the facility were to undergo
      a
      major renovation or be demolished. The company has no current plans to dispose,
      demolish or perform any major renovations. Because the company has not made
      any
      decision to retire, sell, demolish or abandon the facility, the fair market
      value of any conditional asset retirement obligation has not been determined.
      For the same reason, the company cannot recognize a liability for the potential
      removal of asbestos because it cannot reasonably estimate the fair market value
      of the obligation. The company does not have sufficient information because
      the
      settlement date or range of potential settlement dates is not estimable at
      this
      time and therefore sufficient information is not available to apply an expected
      present value technique.





7





***Grants***


The
      company receives grants from various Commonwealth of Pennsylvania agencies
      which
      reimburse the company for specific training expenses. The company records
      receipt of these grants as an offset to the related expense.





In
      2006,
      in partnership with The Reinvestment Fund, Allegheny West Foundation, and the
      Department of Community and Economic Development of the Commonwealth of
      Pennsylvania (the “DCED”), the company activated Project Fresh Start (the
“Project”). The Project is an entrepreneurial development program that provides
      a unique opportunity for qualified minority entrepreneurs to purchase
      distribution routes. The source of grant monies for this program is the DCED,
      and the funds pass through the company and are distributed to the seller of
      a
      route on behalf of the applicant and earned over time by the applicants selected
      by the partners in the Project. The company records an offsetting asset and
      liability for the total amount of any outstanding, unearned applicant
      grants.





***Marketing
      Costs***


The
      company expenses marketing costs, which include advertising and consumer
      promotions, as incurred. Marketing costs are included as a part of selling,
      general and administrative expense.





***Computer
      Software Costs***


The
      company capitalizes certain costs, such as software coding, installation and
      testing that are incurred to purchase or create and implement internal use
      computer software in accordance with Statement of Position 98-1, “Accounting for
      Costs of Computer Software Development or Obtained for Internal Use.” The
      majority of the company’s capitalized software relates to the implementation of
      the enterprise resource planning (“ERP”) and handheld computer
      systems.





***Freight,
      Shipping and Handling Costs***


Outbound
      freight, shipping and handling costs are included as a part of selling, general
      and administrative expense. Inbound freight, shipping and handling costs are
      capitalized with inventory and expensed with cost of goods sold.





***Pension
      Plan***


The
      company’s funding policy for the defined benefit (“DB”) pension plan is to
      contribute amounts deductible for federal income tax purposes plus such
      additional amounts, if any, as the company’s actuarial consultants advise to be
      appropriate. In 1987 the company elected to immediately recognize all gains
      and
      losses in excess of the pension corridor.





The
      company accrues normal periodic pension expense or income during the year based
      upon certain assumptions and estimates from its actuarial consultants in
      accordance with SFAS No. 87, “Employers’ Accounting for Pensions.” These
      estimates and assumptions include discount rate, rate of return on plan assets,
      compensation increases, mortality, and employee turnover. In addition, the
      rate
      of return on plan assets is directly related to changes in the equity and credit
      markets, which can be very volatile. The use of the above estimates and
      assumptions, market volatility and the company’s election to immediately
      recognize all gains and losses in excess of its pension corridor in the current
      year may cause the company to experience significant changes in its pension
      expense or income from year to year. Expense or income that falls outside the
      corridor is recognized only in the fourth quarter of each year.





On
      September 29, 2006, the FASB issued Statement No. 158, Employers’ Accounting for
      Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
      Statements No. 87, 88, 106, and 132(R) (“FAS 158”).  FAS 158 changes
      balance sheet accounting and requires employers to recognize on their balance
      sheets a liability and/or an asset equal to the under-funded or over-funded
      status of their defined benefit pension and other postretirement benefit plans.
      It is effective for public companies for fiscal years ending after December
      15,
      2006.  The company’s required adoption date for FAS 158 is its fiscal
      year-end, December 30, 2006. The company’s defined benefit plans consist of a DB
      Pension Plan, a DB Supplemental Executive Retirement Plan (“DB SERP”) and a DB
      Directors’ Retirement Plan (collectively the “DB Plans”). Its other
      postretirement benefit plans consist of postretirement health insurance and
      postretirement life insurance programs (the “OPEB Plans”).





The
      company amended the DB Pension Plan to freeze benefit accruals effective March
      26, 2005. Participants are credited for service after March 26, 2005 solely
      for
      vesting purposes pursuant to the terms of the DB Pension Plan. Each vested
      participant will receive their total pension benefit accrued through March
      26,
      2005 upon retirement from the company.




Effective
      March 27, 2005, the company adopted a new company funded retirement plan, which
      is a defined contribution benefit (the “DC Plan”) that replaces the benefit
      provided in the DB Pension Plan. In the DC Plan, the company contributes cash
      weekly into individual accounts for eligible employees. These contributions
      are
      equal to a percentage of an employee’s eligible compensation and increase in
      pre-established increments based upon a combination of the employee’s age and
      years of credited service.


8


***Accounting
      for Derivative Instruments***


The
      company has entered into certain variable-to-fixed interest rate swap contracts
      to fix the interest rates on a portion of its variable interest rate debt.
      These
      swap contracts are accounted for as cash flow hedges as per the criteria in
      SFAS
      No. 133, “Accounting for Derivative and Hedging Activities,” as amended and
      interpreted. Accordingly, these derivatives are marked to market and the
      resulting gains or losses are recorded in other comprehensive income as an
      offset to the related hedge asset or liability. The actual interest expense
      incurred, inclusive of the effect of the hedge in the current period, is
      recorded in the Statement of Operations. The amount of other comprehensive
      income resulting from these derivatives is included in the notes to the
      consolidated financial statements.





***Treasury
      Stock***


Treasury
      stock is stated at cost. Cost is determined by the FIFO method.





***Accounting
      for Income Taxes***


The
      company accounts for income taxes under the asset and liability method. Deferred
      tax assets and liabilities are determined based on differences between financial
      reporting and tax basis of assets and liabilities and are measured using the
      enacted tax rates in effect when the differences are expected to be recovered
      or
      settled.





***Net
      Income Per Common Share***


Net
      income
      per common share is presented as basic and diluted earnings per share. Net
      income per common share - Basic is based on the weighted average number of
      common shares outstanding during the year. Net income per common share - Diluted
      is based on the weighted average number of common shares and dilutive potential
      common shares outstanding during the year. Dilution is the result of outstanding
      stock options and restricted shares.





***Share-based
      Compensation***


The
      company adopted SFAS 123(R), Share-Based Payment (“FAS 123(R)”), using the
      modified prospective transition method, which requires the application of the
      accounting standard as of January 1, 2006, the first day of the company’s fiscal
      year 2006. The company’s consolidated financial statements as of and for the
      period ending September 30, 2006, reflect the impact of FAS 123(R). In
      accordance with the modified prospective transition method, the company’s
      consolidated financial statements for prior periods have not been restated
      to
      reflect, and do not include, the impact of FAS 123(R).





Share-based
      compensation expense recognized during the current period is based on the value
      of the portion of share-based payment awards that is ultimately expected to
      vest. The total value of compensation expense for restricted stock is equal
      to
      the ending price of Tasty Baking Company shares on the date of grant. FAS 123(R)
      requires forfeitures to be estimated at the time of grant in order to estimate
      the amount of share-based awards that will ultimately vest. The forfeiture
      rate
      is based on the company’s historical forfeiture experience.





The
      company is in the process of calculating any applicable historical pool of
      windfall tax benefits.





***Recent
      Accounting Statements***


In
      July
      2006, the FASB issued Interpretation No. 48, Accounting for Uncertain Tax
      Positions, an Interpretation of FAS 109**(“FIN 48”), which
      clarifies the criteria for recognition and measurement of benefits from
      uncertain tax positions. Under FIN 48, an entity should recognize a tax benefit
      when it is “more-likely-than-not”, based on the technical merits, that the
      position would be sustained upon examination by a taxing authority. The amount
      to be recognized should be measured as the largest amount of tax benefit that
      is
      greater than 50 percent likely of being realized upon ultimate settlement with
      a
      taxing authority that has full knowledge of all relevant information.
      Furthermore, any change in the recognition, derecognition or measurement of
      a
      tax position should be recognized in the interim period in which the change
      occurs. FIN 48 is effective December 31, 2006, for the company and any change
      in
      net assets as a result of applying the Interpretation will be recognized as
      an
      adjustment to retained earnings on that date. Management is in the process
      of
      evaluating its uncertain tax positions in accordance with FIN 48.





On
      September 13, 2006, the SEC staff issued Staff Accounting Bulletin No. 108
      (“SAB
      108”) in order to address the observed diversity in quantification practices
      with respect to annual financial statements. SAB 108 is intended to address
      SEC
      concerns over the diversity of practices in companies’ and auditors’
quantification of financial statement misstatements.





9


In SAB
      108,
      the SEC staff establishes an approach that requires quantification of financial
      statement errors based on the effects of the error on each of the company's
      financial statements and the related financial statement disclosures. This
      model
      is commonly referred to as a "dual approach" because it essentially requires
      quantification of errors under both the iron-curtain and the roll-over methods.





From
      a
      transition perspective, SAB
      108
      permits existing public companies to record the cumulative effect of initially
      applying the "dual approach" in the first year ending after November 15, 2006
      by
      recording the necessary "correcting" adjustments to the carrying values of
      assets and liabilities as of the beginning of that year with the offsetting
      adjustment recorded to the opening balance of retained earnings. The company
      is
      currently evaluating the impact of this staff bulletin on its financial
      statements and disclosures for its year ended December 30,
      2006.





On
      September 15, 2006, the FASB issued Statement No. 157, Fair Value Measurements
      (“FAS 157”) which addresses how companies should measure fair value when they
      are required to use a fair value measure for recognition or disclosure purposes
      under generally accepted accounting principles. The company will need to adopt FAS
      157 in
      2008. The company is currently evaluating the extent to which its current
      practices, financial statements and disclosures may change as a result of the
      adoption of FAS 157.





On
      September 29, 2006, the FASB issued Statement No. 158, Employers’ Accounting for
      Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
      Statements No. 87, 88, 106, and 132(R) (“FAS 158”).  FAS 158 changes
      balance sheet accounting and requires employers to recognize on their balance
      sheets a liability and/or an asset equal to the under-funded or over-funded
      status of their defined benefit pension and other postretirement benefit plans.
      It is effective for public companies for fiscal years ending after December
      15,
      2006.  The company’s required adoption date for FAS 158 is its fiscal
      year-end, December 30, 2006.





The
      funded
      status that the company will report on its balance sheet under FAS 158 is to
      be
      measured as the difference between the fair market value of plan assets and
      the
      benefit obligation on a plan-by-plan basis. For the company’s DB Plans, the
      benefit obligation is the projected benefit obligation PBO.  For the OPEB
      Plans, the benefit obligation is the accumulated postretirement benefit
      obligation.  The company’s DB Plans are under-funded (DB Pension Plan) and
      unfunded (DB SERP and DB Directors’ Retirement Plan), and the company’s OPEB
      plans are unfunded.





FAS
      158
      requires that previously disclosed but unrecognized gains/losses, prior service
      costs/credits, and transition assets/obligations be recognized at adoption
      as a
      component of shareholders’ equity in accumulated other comprehensive income
      (“AOCI”), net of applicable income taxes. Previously, these amounts were
      disclosed in the notes to the company’s financial statements. FAS 158 also
      requires that for each underfunded plan, an amount equal to the next 12 months’
expected benefit payments in excess of the plan's current assets be classified
      as current liability. The remainder is to be classified as non-current
      liability.





The
      required transition method of adoption for FAS 158 is prospective. Prior period
      statements will not be restated.





The
      company does not anticipate a significant effect on its balance sheet for its
      DB
      Plans due to the adoption of FAS 158. Unrecognized costs were reflected in
      AOCI
      at the end of 2005 in connection with the recording of an additional minimum
      liability. However, assuming market conditions (discount rate, rate of
      return and mortality assumptions) remain at the current level, FAS 158 is
      expected to reduce the liability recognized on the balance sheet for the
      company’s OPEB Plans by approximately $9 million, with a corresponding increase
      in AOCI, net of tax effects. Assuming an expected tax rate of 39% at December
      30, 2006, the increase in AOCI is estimated to be $5 million.




The
      company has negotiated an amendment to the net worth covenants in its credit
      agreements that would eliminate any events of default resulting from the
      adoption of FAS 158. The company does not anticipate that it will violate any
      of
      the covenants in its credit agreements upon adoption of FAS 158.







10


**2.** **Restructure
      Charges**





From
      fiscal years 2001 to 2005, the company implemented several strategies that
      resulted in restructuring charges. In the fourth quarter of 2005, the company
      incurred a $145 restructure charge related to specific arrangements made with
      certain employees who departed the company. Also in the fourth quarter of 2005,
      the company incurred a $77 restructure charge related to rent, utility and
      security charges for closed thrift stores that were previously underestimated
      and the company reclassified $208 of the restructuring liability related to
      accrued liabilities for ongoing services to certain employees who departed
      the
      company prior to 2005. The company recognized net restructure charge reversals
      in 2005 of $151.




**RESTRUCTURE
                  RESERVE ACTIVITY****Lease
                  obligations**
              
              **Severance**
              
              **Other**
              
              **Total****Balance****December
                  25, 2004**
              
              **$**
              **407**
              
              **$**
              **592**
              
              **$**
              **38**
              
              **$**
              **1,037**2005
                  Restructure charges
              
              
              -
              
              
              136
              
              
              9
              
              
              **145**2005
                  Reclassification of severance related items
              
              
              -
              
              
              (208
              )
              
              -
              
              
              **(208**
              **)**2005
                  Reversal of reserve, net of adjustments
              
              
              40
              
              
              (151
              )
              
              37
              
              
              **(74**
              **)**2005
                  Payments
              
              
              (319
              )
              
              (281
              )
              
              (53
              )
              
              **(653**
              **)****Balance
                  December 31, 2005**
              
              
              **128**
              
              
              **88**
              
              
              **31**
              
              
              **247**Q1
                  2006 Payments
              
              
              (54
              )
              
              (88
              )
              
              (3
              )
              
              **(145**
              **)****Balance
                  April 1, 2006**
              
              
              **74**
              
              
              **-**
              
              
              **28**
              
              
              **102**Q2
                  2006 Payments
              
              
              (43
              )
              
              -
              
              
              (14
              )
              
              **(57**
              **)****Balance
                  July 1, 2006**
              
              
              **31**
              
              
              **-**
              
              
              **14**
              
              
              **45**Q3
                  2006 Payments
              
              
              (19
              )
              
              -
              
              
              (1
              )
              
              **(20**
              **)****Balance
                  September 30, 2006**
              
              **$**
              **12**
              
              **$**
              **-**
              
              **$**
              **13**
              
              **$**
              **25**






The
      balance of the lease obligations and other charges are expected to be paid
      in
      the fourth quarter of 2006.





**3.** **Inventories**








Inventories
        are classified as follows:


**Sept.
                  30, 2006**
              
              **Dec.
                  31, 2005**Finished
                  goods
              
              $
              1,530
              
              $
              1,556Work
                  in progress
              
              
              175
              
              
              173Raw
                  materials and supplies
              
              
              4,774
              
              
              4,743$
              6,479
              
              $
              6,472







**4.** **Property,
      Plant and Equipment**





In
      the
      third quarter, July 7, 2006, the company received $1.6 million from Keystone
      Redevelopment Partners, LLC (“Keystone”) in consideration for granting Keystone
      an option to acquire the company’s Fox Street property on which its corporate
      offices and distribution center are located (the “Property”). If Keystone
      exercises its option, the company would sell the Property for an additional
      $14.4 million in accordance with the terms of the Option Agreement. The $1.6
      million option price is nonrefundable unless, in the event the option is
      exercised by Keystone, the company cannot or does not convey good, marketable
      and insurable fee simple title of the Property to Keystone.





In
      2006,
      the company announced that it will begin exploring long-term strategic
      manufacturing options. The company will evaluate various manufacturing
      alternatives, including upgrading the original Philadelphia bakery, enhancing
      use of the Oxford bakery, relocating to a new facility or a combination of
      these
      options. There can be no assurance that any change in the company’s
      manufacturing strategy will occur as a result of this evaluation.





11




**5.** **Credit
      Facility**





On
      September 13, 2005, the company entered into an Amended and Restated Credit
      Agreement (“Amended Credit Agreement”) to replace its prior credit facility. The
      Amended Credit Agreement provides for a secured commitment in the amount of
      $35
      million with a scheduled maturity in five years, due September 2010. It
      eliminated the short term portion and reduced the interest rate margins and
      the
      commitment fees charged to the company, as described in the Amended Credit
      Agreement. Modifications were also made to the Tangible Net Worth covenant
      and
      the Funded Debt covenant that make them less restrictive. Interest rates in
      the
      Amended Credit Agreement are indexed to LIBOR based upon the company’s ratio of
      debt to EBITDA, rates may decrease up to 50 basis points based on that ratio.
      Commitment fees are charged on the unused portion of the commitment and range
      from 10 to 30 basis points based upon the same ratio used to determine interest
      rates. The proceeds from the Amended Credit Agreement are being used for general
      corporate purposes and other uses as permitted.





On
      September 13, 2005, the company also entered into a term loan for $5.3 million.
      The term loan is based upon a 15 year amortization with a scheduled maturity
      in
      five years, due September 2010. The terms and conditions of the term loan are
      generally the same as those in the Amended Credit Agreement. The entire proceeds
      of the term loan were used to fund a voluntary contribution to the company’s
      previously frozen DB Plan.





On
      December 20, 2005, the company also entered into a mortgage loan for $2.15
      million and a second term loan for $2.55 million to fund the purchase of the
      Hunting Park Bakery building and land for $4.7 million from the company’s DB
      Plan. The mortgage loan is based upon a 20 year amortization with a scheduled
      maturity in ten years, due December 2015. The term loan is based upon a 15
      year
      amortization with a scheduled maturity in five years, due September 2010. The
      terms and conditions of the mortgage loan and the term loan are generally the
      same as those in the Amended Credit Agreement.





In
      order
      to hedge a portion of the company’s exposure to changes in interest rates the
      company entered into a five-year $6 million interest rate swap on August 3,
      2005
      with a fixed LIBOR rate of 4.64%. The company also entered into two five-year
      interest rate swaps for its term loans for $5.3 and $2.55 million on September
      13 and December 21, 2005 with fixed LIBOR rates of 4.42% and 4.99%,
      respectively. Additionally, on December 21, 2005 the company entered into a
      ten-year $2.15 million interest rate swap for its mortgage loan with a fixed
      LIBOR rate of 5.08%. The total notional amount for all swaps is $16 million,
      and
      the LIBOR rates above are subject to an additional credit spread which can
      range
      from 75 basis points to 140 basis points.





The
      company has negotiated an amendment to its Amended Credit Agreement to permit
      the potential sale of its Fox Street facility and to eliminate any events of
      default resulting from the adoption of FAS 158 in the net worth covenants.
      The
      company does not anticipate that it will violate any provision or covenant
      in
      its credit agreements upon any sale of the Fox Street facility or the adoption
      of FAS 158.








**6.** **Defined
      Benefit Retirement Plans**





The
      company maintains a partially funded DB Pension Plan providing retirement
      benefits. Benefits under this DB Pension Plan generally are based upon the
      employee’s years of service and compensation during the years preceding
      retirement. The company maintains an unfunded DB SERP providing retirement
      benefits for key employees designated by the Board of Directors. At this time,
      none of the participants in the DB SERP are employed by the company. Benefits
      under the DB SERP generally are based upon the key employees’ years of service
      and compensation during the years preceding retirement. The company also
      maintains an unfunded Directors’ Retirement Plan. The benefit amount is the
      annual retainer in the year of retirement.





In
      December 2004, upon approval by the Board of Directors, the company announced
      to
      its employees that it was amending the DB Pension Plan to freeze benefit
      accruals effective March 26, 2005. Participants are credited for service after
      March 26, 2005, solely for vesting purposes pursuant to the terms of the DB
      Pension Plan. Each vested participant will receive their total defined benefit
      pension accrued through March 26, 2005, upon retirement from the company.





Effective
      March 27, 2005, the company adopted a new company DC Plan which is a defined
      contribution benefit that replaces the benefit provided in the DB Pension Plan.
      See Note 7 in the financial statements.





Significant
      transactions between the company and the DB Pension Plan that occurred during
      2005 were: (1) a tax deductible cash contribution of $5.3 million made on
      September 13, 2005; and (2) the company’s purchase of the Hunting Park Bakery
      from the DB Pension Plan on December 20, 2005 for $4.7 million. The $5.3 million
      contribution was made to improve the cash funded status of the DB Pension Plan.
      The purchase of the Hunting Park Bakery was made to reduce interest costs to
      the
      company and to further improve the funded status of the DB Pension Plan. Prior
      to the purchase, the company recorded its use of the Hunting Park Bakery as
      a
      capital lease with the DB Pension Plan. The purchase price of $4.7 million
      for
      the Hunting Park Bakery was determined by the terms of its lease agreement
      and
      exceeded the DB Pension Plan’s book value for the asset by approximately $1.6
      million. The terms of the lease agreement were drafted in 1984 to comply with
      specific guidelines established by the Department of Labor that permitted the
      continued lease of the Hunting Park Bakery as an exemption to ERISA’s prohibited
      transaction rules. Both of these transactions were funded with the proceeds
      of
      the term loan and the mortgage loan.





12




The
      components of the DB Pension Plan, DB SERP, and DB Directors’ Retirement plans
      cost are summarized as follows:





**ThirteenWeeks
                  Ended**
              
              **Thirty-nineWeeks
                  Ended****9/30/06**
              
              **9/24/05**
              
              **9/30/06**
              
              **9/24/05**Service
                  cost-benefits earned during the year
              
              $
              10
              
              $
              (5
              )
              $
              22
              
              $
              257Interest
                  cost on projected benefit obligation
              
              
              1,237
              
              
              1,276
              
              
              3,721
              
              
              3,694Expected
                  return on plan assets
              
              
              (1,277
              )
              
              (1,352
              )
              
              (3,811
              )
              
              (3,884
              )Prior
                  service cost amortization
              
              
              (4
              )
              
              (5
              )
              
              (12
              )
              
              (13
              )SERP
                  amendment
              
              
              18
              
              
              13
              
              
              70
              
              
              41Net
                  DB pension amount charge/(benefit) to income
              
              $
              (16
              )
              $
              (73
              )
              $
              (10
              )
              $
              95








**7.** **Defined
      Contribution Retirement Plans**





Effective
      March 27, 2005, the company adopted a new DC Plan which is a defined
      contribution benefit that replaces the benefit provided in the DB Pension Plan.
      In the new DC Plan, the company makes cash contributions into individual
      accounts for all eligible employees. These contributions are equal to a
      percentage of an employee’s eligible compensation and increase with the
      employee’s age and years of credited service.





Effective
      March 27, 2005, the company merged the Tasty Baking Oxford, Inc. 401(k) Savings
      Plan (“Oxford Plan”) into the Tasty Baking Company 401(k) Thrift Plan (“Thrift
      Plan”) and renamed the merged plans as the Tasty Baking Company 401(k) and
      Company Funded Retirement Plan (“Retirement Plan”). All assets of the Oxford
      Plan were transferred to the Retirement Plan immediately after the effective
      date of the merger. In the Retirement Plan, all participants receive a company
      match equal to 50% of their elective deferrals that do not exceed 4% of their
      compensation as defined in the Retirement Plan. In the Retirement Plan, the
      waiting period for participation has been eliminated. Participants are offered
      a
      broad array of investment choices.





In
      addition, as a replacement for the company’s DB Pension Plan which was frozen as
      of March 26, 2005, the company makes weekly contributions to the Retirement
      Plan
      for all eligible employees. As noted above, these contributions are based upon
      employees’ point values which are the sum of age and years of service as of
      January 1 each year. All eligible employees receive contributions that range
      from 2% to 5% of eligible compensation relative to their point totals. In
      addition, all employees at March 27, 2005, who had 20 years of service, or
      10
      years of service and 60 points, receive an additional weekly “grandfathered”
contribution of between 1.5% and 3.5% of salary. This “grandfathered”
contribution percentage is fixed as of March 27, 2005, and will be paid weekly
      with the regular contribution until those covered employees retire or separate
      from the company. These “grandfathered” contributions are being made to
      compensate older employees for the shorter earnings period that their accounts
      will have to appreciate in value relative to their normal retirement dates.





Until
      March 27, 2005, the Thrift Plan permitted participants to make contributions
      to
      the plan based upon a pre-tax salary reduction basis in accordance with the
      provision of Section 401(k) of the Internal Revenue Code. After six months
      of
      employment, the company matched 100% of participants’ contributions up to a
      specified limit. The Thrift Plan was administered under a Section 401(k)
      prototype plan. Under the Thrift Plan, the company’s contributions were invested
      in Tasty Baking Company common stock, and participants were able to choose
      from
      a selection of guaranteed and mutual fund options offered by Dreyfus for
      investment of their contributions. The company also maintained the Oxford Plan
      for the employees who worked for Tasty Baking Oxford, Inc. The Oxford Plan
      was
      similar to the Thrift Plan except that the company match was contributed in
      cash.





Effective
      October 2004, the company converted the SERP for one eligible active employee
      from an unfunded defined benefit to an unfunded defined contribution SERP to
      be
      consistent with the changes in the DC Plan.




13




**Thirteen
                  Weeks Ended**
              
              **Thirty-nine
                  Weeks Ended****9/30/06**
              
              **9/24/05**
              
              **9/30/06**
              
              **9/24/05**Funded
                  retirement plan
              
              $
              461
              
              $
              525
              
              $
              1,395
              
              $
              1,026Defined
                  contribution SERP
              
              
              71
              
              
              47
              
              
              213
              
              
              142Net
                  DC pension amount charged to income
              
              $
              532
              
              $
              572
              
              $
              1,608
              
              $
              1,168








**8.** **Postretirement
      Benefits Other than Pensions**





In
      addition to providing pension benefits, the company also provides certain
      unfunded health care and life insurance programs for a number of its retired
      employees. These benefits are provided through contracts with insurance
      companies and health service providers.





Certain
      changes were made to the company’s postretirement benefits that resulted in a
      reduction of the projected benefit obligation. Effective November 1, 2005,
      the
      company announced that it was amending the medical benefits paid for retirees
      by
      eliminating coverage for most post-65 retirees as of January 1, 2006. Coverage
      was maintained for all pre-65 retirees and for certain post-65 retirees who
      had
      qualifying dependents that were pre-65. This change was made in response to
      the
      implementation of Medicare Part D which made non-sponsored plans financially
      more favorable to most post-65 retirees. Changes to retiree life insurance
      benefits were also simultaneously announced with the medical benefit changes
      effective as of January 1, 2006. Life insurance for incumbent retirees at
      company group rates was capped at $20 of coverage. Incumbent retirees who
      purchase coverage in excess of $20 and all new retirees after January 1, 2006
      pay age based rates for their life insurance benefit.





Components
      of net periodic postretirement benefit cost/(benefit):





**Thirteen
                  Weeks Ended**
              
              **Thirty-nine
                  Weeks Ended****9/30/06**
              
              **9/24/05**
              
              **9/30/06**
              
              **9/24/05**Service
                    cost
              
              $
              75
              
              $
              110
              
              $
              200
              
              $
              329Interest
                    cost
              
              
              91
              
              
              182
              
              
              272
              
              
              547Amortization
                    of unrecognized prior service cost
              
              
              (550
              )
              
              (119
              )
              
              (1,372
              )
              
              (358
              )Amortization
                    of unrecognized gain
              
              
              (19
              )
              
              (12
              )
              
              (78
              )
              
              (37
              )Total
                FAS 106 Net Postretirement Benefit Cost/(Benefit)
              
              $
              (403
              )
              $
              161
              
              $
              (978
              )
              $
              481





Employer
      Contributions:


Estimated
      company contributions for the thirty-nine weeks ended September 30, 2006 are
      $253.








**9.** **Stock
      Compensation**





At
      the
      2006 Annual Meeting of Shareholders of the company held on May 11, 2006, the
      company's shareholders approved the Tasty Baking Company 2006 Long Term
      Incentive Plan (the "Plan") as adopted by the Company's Board of Directors
      (the
      "Board") on March 24, 2006. The aggregate number of shares reserved and
      available for grant under the Plan is 350,000 shares of the company’s common
      stock.





The
      Plan
      authorizes the Compensation Committee (the "Committee") of the Board to grant
      awards of stock options, stock appreciation rights, unrestricted stock,
      restricted stock (“RSA”) (including performance restricted stock) and
      performance shares to employees, directors and consultants or advisors of the
      company. The option price is determined by the Committee and, in the case of
      incentive stock options, will be no less than the fair market value of the
      shares on the date of grant. Options lapse at the earlier of the expiration
      of
      the option term specified by the Committee (not more than ten years in the
      case
      of incentive stock options) or three months following the date on which
      employment with the company terminates.





The
      company also has an active 2003 and 1997 long term incentive plan. The aggregate
      number of shares available for grant under the 2003 plan is 50,594 and the
      1997
      plan is 102,161. The terms and conditions of the 2003 and 1997 plan are
      generally the same as the 2006 plan. A notable difference is that the 1997
      plan
      can award shares only to employees of the company while the 2003 plan can only
      award shares to employees and directors of the company.





14


On
      December 16, 2005, the Board and the Committee approved the acceleration of
      vesting of all outstanding, unvested stock options previously awarded to the
      company’s employees, officers (including executive officers) and directors under
      the company’s 1994, 1997 and 2003 Long Term Incentive Plans. All unvested stock
      options were “out-of-the-money” as of the closing stock price on December 16,
      2005, with a range of exercise prices from $7.55 to $11.30 per share. As a
      result of the acceleration, stock options to acquire approximately 173,167
      shares of the company’s common stock became exercisable on December 31, 2005,
      85% of which were scheduled to vest during 2006. Of the total number of shares
      underlying the accelerated stock options, approximately 27,998 were held by
      directors and 114,394 were held by executive officers.





All
      other
      terms and conditions applicable to these stock options, including exercise
      prices and holding period requirements remained unchanged. The company had
      previously imposed a five year holding period requirement on any shares obtained
      through the exercise of options awarded on or after August 7, 2003. These 35,000
      of the then unvested options were not subject to this requirement, with the
      lowest exercise price on those options set at $8.60 per share. Accordingly,
      this
      holding period requirement is expected to prevent unintended benefits to the
      holders of the majority of these stock options as a result of this accelerated
      vesting. The purpose of this accelerated vesting was to enable the company
      to
      avoid recognizing compensation expense associated with these options in future
      periods as required by FAS 123(R) which the company adopted January 1, 2006.
      As
      a result of the acceleration of vesting, the company has reduced the non-cash,
      pre-tax compensation expense it would otherwise have been required to record
      by
      approximately $410 over the original option vesting period, including
      approximately $360 in fiscal 2006.





Notwithstanding,
      the vesting and termination provisions described above, under the terms of
      the
      Change of Control Agreements and Employment Agreements that the company entered
      into with certain executive officers, upon a change of control, the shares
      granted as RSAs vest and any restrictions on outstanding stock options lapse
      immediately. Additionally, under the terms of those agreements, in certain
      change of control circumstances, shares granted as RSAs may vest after
      termination of employment.





A
      summary
      of stock options as of September 30, 2006 is presented below:




**Weighted-Average**
                
                **Weighted-Average**
                
                **Aggregate
                    Intrinsic****Shares
                    (000s)**
                
                **Exercise
                    Price**
                
                **Remaining
                    Contractual Term**
                
                **Value
                    (000s)**Outstanding
                    at Dec. 31, 2005
                
                
                602
                
                $
                10.51Granted
                
                
                -
                
                
                -Forfeited
                
                
                (52
                )
                $
                10.58Exercised
                
                
                -
                
                
                -Outstanding
                    at April 1, 2006
                
                
                550
                
                $
                10.50
                
                
                6.50
                
                $
                1,318Granted
                
                
                -
                
                
                -Forfeited
                
                
                (24
                )
                $
                11.34Exercised
                
                
                -
                
                
                -Outstanding
                    at July 1, 2006
                
                
                526
                
                $
                10.47
                
                
                6.36
                
                $
                1,258Granted
                
                
                -
                
                
                -Forfeited
                
                
                (68
                )
                
                10.11Exercised
                
                
                -
                
                
                -Outstanding
                    at September 30, 2006
                
                
                458
                
                $
                10.52
                
                
                6.03
                
                $
                1,103Options
                    exercisable at April 1, 2006
                
                
                550
                
                $
                10.50
                
                
                6.50
                
                $
                1,318Options
                    exercisable at July 1, 2006
                
                
                526
                
                $
                10.47
                
                
                6.36
                
                $
                1,258Options
                    exercisable at Sept. 30, 2006
                
                
                458
                
                $
                10.52
                
                
                6.03
                
                $
                1,103





As
      of
      September 30, 2006, there was no unrecognized compensation related to nonvested
      stock options. For the first thirty-nine weeks of 2006, there were no options
      granted and there was no cash received from option exercises. Additionally,
      there was no compensation expense recognized in the Consolidated Statements
      of
      Operations for stock options in the thirty-nine weeks ended September 30,
      2006.




15




The
      company recognizes expense for restricted stock using the straight-line method
      over the requisite service period. A summary of the restricted stock as of
      September 30, 2006 is presented below:




**Shares
                  (000s)**
              
              **Weighted
                  -Average Fair Value**Nonvested
                  at December 31, 2005
              
              
              82
              
              $
              8.00Granted
              
              
              131
              
              $
              7.36Forfeited
              
              
              -
              
              
              -Exercised
              
              
              -
              
              
              -Nonvested
                  at April 1, 2006
              
              
              213
              
              $
              7.61Granted
              
              
              5
              
              
              8.98Forfeited
              
              
              (35
              )
              
              7.63Exercised
              
              
              -
              
              
              -Nonvested
                  at July 1, 2006
              
              
              183
              
              $
              7.64Granted
              
              
              -Forfeited
              
              
              (1
              )
              
              7.63Exercised
              
              
              -Nonvested
                  at September 30, 2006
              
              
              182
              
              $
              7.64








As
      of
      September 30, 2006, there was $930 of unrecognized compensation cost related
      to
      nonvested restricted stock which is expected to be recognized over a
      weighted-average period of approximately 3.9 years.





Total
      pre-tax compensation expense recognized in the consolidated statements of
      operations for restricted stock was $71 and $69 for the thirteen weeks ended
      September 30, 2006 and September 24, 2005, respectively. Total pre-tax
      compensation expense recognized in the consolidated statements of operations
      for
      restricted stock was $216 and $204 for the thirty-nine weeks ended September
      30,
      2006 and September 24, 2005, respectively.








**10.** **Comprehensive
      Income**


**Thirteen
                  Weeks Ended**
              
              **Thirty-nine
                  Weeks Ended****9/30/06**
              
              **9/24/05**
              
              **9/30/06**
              
              **9/24/05**Net
                  income as reported
              
              $
              506
              
              $
              311
              
              $
              2,595
              
              $
              1,676Other
                  comprehensive income:Current
                  year changes in fair market value of derivativeinstruments
                  qualifying as hedges, net of ($176), ($46),$24
                  and ($46) income taxes, respectively (a)
              
              
              (264
              )
              
              (69
              )
              
              37
              
              
              (69
              )$
              242
              
              $
              242
              
              $
              2,632
              
              $
              1,607




(a)
      The
      fair market value of the company’s interest rate swaps have increased by $76
      ($48 net of $28 taxes) since December 31, 2005, due to rising interest
      rates.





16




**Item
      2.****Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operation**


(000’s,
      except share and per share amounts)


All
      disclosures are pre-tax, unless otherwise noted.





**Results
      of Operations**





**For
      the Thirteen Weeks ended September 30, 2006 and September 24,
      2005**





**Overview**





Net
      income
      for the third quarter of 2006 was $506 or $0.06 per fully-diluted share. Net
      income for the third quarter of 2005 was $311 or $0.04 per fully-diluted share.
      Net income increased $195, or 63.0%, and earnings per share increased $0.02,
      or
      50%, compared to the same quarter last year.





**Sales**





Net
      sales
      decreased by 2.6% in the third quarter of 2006 compared to the same quarter
      in
      2005 on a volume decline of 11.0% year-over-year. The volume decline was driven
      by the January 2006 price increase, a shift in consumer spending and increased
      promotional activity by competitors. Gross sales decreased 4.8% in the third
      quarter of 2006 versus the same quarter a year ago driven by the sales volume
      decline, partially offset by the price increase.





Route
      net
      sales were down 3.2% in the third quarter 2006 versus 2005, driven by the volume
      decline. However, route sales experienced improved net sales realization as
      a
      result of the January 2006 list and promoted price increases.





Non-route
      net sales were down 0.7% for the third quarter 2006 compared to the same period
      a year ago. The decrease was caused by the timing of certain 2005 promotional
      programs with key direct customers. Sales to existing third-party distributors
      decreased in line with the sales volume decreases experienced in the company
      route markets but were partially offset by increased sales to new distributors
      as they expanded in new markets.





**Cost
      of Sales**





Cost
      of
      sales, excluding depreciation, for the third quarter of 2006 decreased by 8.6%
      compared to the same period a year ago on the sales volume decline of 11.0%.
      The
      decline was primarily driven by the volume decrease and lower salary-related
      costs, partially offset by the increased maintenance costs and electric and
      gas
      utility expenses. Cost of sales includes product costs, of which approximately
      one-third are more fixed in nature.





**Gross
      Margin**





Gross
      margin after depreciation, was 33.1% of net sales for the third quarter of
      2006
      compared to 29.5% in the third quarter of 2005. The 3.6 percentage point
      improvement resulted from the improved net sales realization primarily in the
      route market during the third quarter of 2006 as well as lower product costs
      as
      a percentage of net sales.





**Selling,
      General and Administrative Expenses**





Selling,
      general and administrative expenses for the third quarter of 2006 increased
      $802, or 6.7%, compared to the third quarter of 2005. This change was mostly
      attributed to increased marketing expense and increased transportation costs,
      due to higher fuel prices.





**Depreciation**





Depreciation
      expense for the third quarter of 2006 increased $189, or 13.1%, compared to
      the
      same period a year ago. The third quarter of 2005 included the benefit of the
      required triennial revaluations of the lease for the company’s Hunting Park
      bakery which reduced depreciation expense in the third quarter of 2005 by
      $136.





**Non-Operating
      Items**





Interest
      expense increased by $38 or 11.4%, in the third quarter of 2006 compared to
      the
      third quarter of 2005. This was due to increased borrowing levels resulting
      from
      the impact of the 2006 third quarter term loan and mortgage loan compared the
      same quarter a year ago and higher rates of interest for the portion of debt
      not
      covered by swap contracts. The company is exposed to market risk relative to
      its
      interest expense as its notes payable and long-term debt have floating interest
      rates that vary with the conditions of the credit market.





17




Other
      income, net, decreased by $67 in the third quarter of 2006 compared to the
      third
      quarter of 2005.





The
      effective income tax rate was 29.6% and 34.0% for the thirteen weeks ended
      September 30, 2006 and September 24, 2005, respectively. These rates compare
      to
      a federal statutory rate of 34.0%. In 2006, the difference between the effective
      tax rate and the statutory rate is the result of adjusting estimates for certain
      deferred tax assets and liabilities, partially offset by the estimated benefits
      from state tax credits. In 2005, the effective rate includes the result of
      estimated state tax benefits generated from the state tax losses as well as
      state tax credits and the net reversal of a portion of the company’s tax
      reserve.





**For
      the Thirty-nine Weeks ended September 30, 2006 and September 24,
      2005**





**Overview**





Net
      income
      for the thirty-nine weeks ended September 30, 2006, was $2,595 or $0.31 per
      fully-diluted share. Net income for the thirty-nine weeks ended September 24,
      2005, was $1,676 or $0.21 per fully-diluted share.





**Sales**





Net
      sales
      decreased by 0.4% in the thirty-nine weeks ended September 30, 2006, compared
      to
      the same period in 2005. Gross sales decreased 0.8% in the first thirty-nine
      weeks of 2006 versus the same period a year ago. Sales volume declined 9.0%
      during this period compared to a year ago driven primarily by the price increase
      instituted in January 2006.





Route
      net
      sales were down 0.8% in the first thirty-nine weeks of 2006 compared to the
      same
      period in 2005, reflecting the net impact of the sales volume decline offset
      by
      the improved price realization.





Non-route
      net sales were up 1.1% for the first thirty-nine weeks of 2006 compared to
      the
      same period in 2005. The increase was attributed to increased sales to third
      party distributors as they expanded sales in new markets offset by the sales
      volume decline.





**Cost
      of Sales**





Cost
      of
      sales, excluding depreciation, for the first thirty-nine weeks of 2006 decreased
      by 3.9% compared to the same period a year ago on the volume decline of 9.0%.
      Cost of sales did not decrease in direct proportion to the sales volume
      percentage decline due to increased fuel and energy costs which increased
      manufacturing costs, in-bound freight expenses and packaging costs.





**Gross
      Margin**





Gross
      margin after depreciation, was 34.3% of net sales for the first thirty-nine
      weeks of 2006 compared to 32.0% in the same period in 2005. The 2.3 percentage
      point improvement resulted primarily from the improved price realization on
      net
      sales resulting from the January 2006 price increase and lower promotional
      expense.





**Selling,
      General and Administrative Expenses**





Selling,
      general and administrative expenses for the first thirty-nine weeks of 2006
      increased $984, or 2.6%, compared to the same period in 2005. This change is
      attributed to an increased investment in marketing in the first and third
      quarters of 2006 compared to the same period of 2005 and increased freight
      and
      transportation costs. These increases were partially offset by a reduction
      of
      salary expense and related personnel costs.





**Depreciation**





Depreciation
      expense in the first thirty-nine weeks of 2006 decreased 2.1% compared to the
      same period a year ago. The higher depreciation expense in 2005 was due to
      the
      accelerated deprecation of the retired ERP system in the first quarter of 2005
      offset by the required triennial revaluation of the lease for the Hunting Park
      facility, which reduced depreciation expense in the third quarter of
      2005.




18





**Non-Operating
      Items**





Interest
      expense increased by $178 or 18.1%, in the first thirty-nine weeks of 2006
      compared to the same period of 2005. This is due to increased borrowing levels
      resulting from the impact of the term loan and the mortgage loan on the first
      thirty-nine weeks of 2006 versus the same period a year ago, and higher rates
      of
      interest for the portion of debt not covered by the interest rate swaps
      contracts.





Other
      income, net, increased by $26 in the first thirty-nine weeks of 2006 compared
      to
      the same period in 2005, primarily due to the gain on the sale of a route in
      the
      first quarter of 2006.





The
      effective income tax rate was 35.5% and 30.1% for the thirty-nine weeks ended
      September 30, 2006 and September 24, 2005, respectively. These rates compare
      to
      a federal statutory rate of 34.0%. In 2006, the difference between the effective
      tax rate and the statutory rate is the result of adjusting estimates for certain
      deferred tax assets and liabilities, as well as a net increase of the company’s
      tax reserve, partially offset by the estimated benefits from state tax credits.
      In 2005, the difference between the effective rate and the statutory rate was
      the result of estimated state tax benefits generated from the state tax losses
      as well as the state tax credits and the net reversal of a portion of the
      company’s tax reserve.








**Liquidity
      and Capital Resources**





Current
      assets at September 30, 2006, were $31,229 compared to $29,008 at December
      31,
      2005, and current liabilities at September 30, 2006, were $22,206, compared
      to
      $19,372 at December 31, 2005. The increase in current assets was driven by
      a net
      increase in accounts receivable of $2,015 as well as an increase in prepayments
      of $304. The $2,834 increase in current liabilities is driven by $1,600 of
      deferred income received from Keystone as part of an option agreement.





During
      2006, subsequent to the close of the second quarter, the company received $1,600
      from Keystone in consideration for granting Keystone an option to acquire the
      company’s Fox Street Property. If Keystone exercises its option, the company
      would sell the Property for an additional $14.4 million in accordance with
      the
      terms of the Option Agreement. The $1.6 million option price is nonrefundable
      unless, in the event the option is exercised by Keystone, the company cannot
      or
      does not convey good, marketable and insurable fee simple title of the Property
      to Keystone. The $1.6 million received was used to reduce the company’s debt
      under its Amended Credit Agreement.





**Cash
      and Cash Equivalents**





Historically,
      the company has been able to generate sufficient amounts of cash from
      operations. Bank borrowings are used to supplement cash flow from operations
      during periods of cyclical shortages. A credit facility is maintained with
      two
      banks and certain capital and operating leases are utilized.





Book
      overdrafts are recorded within current liabilities. Cash flows associated with
      book overdrafts are classified as financing activities. During 2005, the company
      revised the classification for book overdrafts in the Consolidated Balance
      Sheet
      and the Consolidated Statements of Cash Flows. They were previously reported
      as
      an operating activity. The revised classifications have also been reflected
      in
      the comparative prior year amounts for purposes of consistency.





On
      September 13, 2005, the company entered into the Amended Credit Agreement to
      replace its prior credit facility. This Amended Credit Agreement is committed
      until September 2010, in the amount of $35 million, and it eliminated the
      short-term portion of the prior credit facility. On September 13, 2005, the
      company also entered into a term loan for $5.3 million. The entire proceeds
      of
      the term loan were used to fund a voluntary contribution to the company’s
      previously frozen DB Pension Plan. On December 20, 2005, the company entered
      into a mortgage loan for $2.15 million and a second term loan for $2.55 million
      in order to fund the purchase of the Hunting Park Bakery building and land
      for
      $4.7 million from the DB Pension Plan.





On
      August
      3, 2005, in order to hedge a portion of the company’s exposure to changes in
      interest rates the company entered into a five-year $6 million interest rate
      swap with a fixed LIBOR rate of 4.64%. The company also entered into two
      five-year interest rate swaps for its term loans for $5.3 and $2.55 million
      on
      September 13 and December 21, 2005 with fixed LIBOR rates of 4.42% and 4.99%,
      respectively. Also on December 21, 2005, the company entered into a ten- year
      $2.15 million interest rate swap for its mortgage loan with a fixed LIBOR rate
      of 5.08%. The total notional amount for all swaps is $16 million, and the LIBOR
      rates above are subject to an additional credit spread which can range from
      75
      basis points to 140 basis points. It is expected that a one percentage point
      increase in interest rates for the portion of outstanding debt not covered
      by
      swaps would result in additional quarterly expense of approximately
      $20.





19




Net
      cash
      from operating activities for the thirty-nine weeks ended September 30, 2006
      increased by $11,740 compared to the same period in 2005.  This increase
      was driven primarily by an increase of $919 in net income over the same period
      last year, a $5,300 cash contribution to the pension in the same period last
      year, and an increase in the change in accounts payable of $3,154 over the
      same
      period last year.





Net
      cash
      used for investing activities for the thirty-nine weeks ended September 30,
      2006
      decreased by $433 relative to the same period in 2005. In the first thirty-nine
      weeks of 2006, there was a $1,327 increase in capital expenditures relative
      to
      the same period in the prior year due primarily to new packaging and mixing
      equipment installed in the company's production facilities. The increase was
      offset by the receipt of $1,600 from Keystone for the option agreement for
      the
      third quarter of 2006.




Net
      cash
      used for financing activities for the thirty-nine weeks ended September 30,
      2006
      decreased by $12,113 relative to the comparable period in 2005, driven by
      reduced borrowing levels for working capital and the increase borrowing in
      2005
      to fund the company’s DB pension plan.





For
      the
      remainder of 2006, the company anticipates that cash flow from operations,
      along
      with the continued availability of the Amended Credit Agreement, will provide
      sufficient cash to meet operating and financing requirements. ****





**Forward-Looking
      Statements**





Statements
      contained in this Quarterly Report on Form 10-Q, including but not limited
      to
      those under the headings “Risk Factors” and “Management’s Discussion and
      Analysis,” contain "forward-looking statements" within the meaning of the
      Private Securities Litigation Reform Act of 1995, and are subject to the safe
      harbor created by that Act. Such forward-looking statements are based upon
      assumptions by management, as of the date of this Report, including assumptions
      about risks and uncertainties faced by the company. These forward-looking
      statements can be identified by the use of words such as "anticipate,''
      "believe,'' "could,'' "estimate,'' "expect,'' "intend,'' "may,'' "plan,''
      "predict,'' "project,'' "should,'' "would,'' "is likely to,'' or "is expected
      to'' and other similar terms. They may include comments about legal proceedings,
      competition within the baking industry, concentration of customers, commodity
      prices, manufacturing alternatives and strategy, consumer preferences, long-term
      receivables, inability to develop brand recognition in the company’s expanded
      market, production, distribution and inventory concerns, loss of one or both
      of
      the company’s production facilities, availability of capital, fluctuation in
      interest rates, pension expense and related assumptions, changes in long-term
      corporate bond rates or asset returns that could effect the recognition of
      pension corridor expense or income, governmental regulations, legal proceedings,
      protection of the company’s intellectual property and trade secrets and other
      statements contained herein that are not historical facts.





Because
      such forward-looking statements involve risks and uncertainties, various factors
      could cause actual results to differ materially from those expressed or implied
      by such forward-looking statements, including, but not limited to, changes
      in
      general economic or business conditions nationally and in the company’s primary
      markets, the availability of capital upon terms acceptable to the company,
      the
      availability and pricing of raw materials, the costs to upgrade and enhance
      facilities, the cost to acquire (or lease) and fit-out a new facility and
      relocate thereto, the cost and availability of capital to fund improvements
      or
      new facilities, the level of demand for the company’s products, the outcome of
      legal proceedings to which the company is or may become a party, the actions
      of
      competitors within the packaged food industry, changes in consumer tastes or
      eating habits, the success of business strategies implemented by the company
      to
      meet future challenges, the retention of key employees, and the ability to
      develop and market in a timely and efficient manner new products which are
      accepted by consumers. If any of our assumptions prove incorrect or should
      unanticipated circumstances arise, our actual results could differ materially
      from those anticipated by such forward-looking statements. The differences
      could
      be caused by a number of factors or combination of factors, including, but
      not
      limited to, those factors described in the company’s 2005 Annual Report on Form
      10-K (“2005 Form 10-K”), “Item 1A, Risk Factors” as updated below in this Form
      10-Q under the heading of Risk Factors. Readers are strongly encouraged to
      consider these factors when evaluating any such forward-looking statements.
      The
      company undertakes no obligation to publicly revise or update such statements,
      except as required by law. Readers are advised, however, to consult any
      additional public disclosures by the company (such as in the company’s filings
      with the SEC or in company press releases) on related subjects.






20




**Item
      3.****Quantitative
      and Qualitative Disclosures about Market Risk**





For
      information regarding the company’s exposure to certain market risk, see Item
      7A, Quantitative and Qualitative Disclosures about Market Risk, in the 2005
      Form
      10-K. There have been no material changes in the company’s portfolio of
      financial instruments or market risk exposures from the fiscal 2005
      year-end.








**Item
      4.** **Controls
      and Procedures**





(a)
      Evaluation of Disclosure Controls and Procedures





The
      company maintains disclosure controls and procedures that are designed to ensure
      that information required to be disclosed in the company’s reports filed or
      submitted pursuant to the Securities Exchange Act of 1934, as amended (the
      “Exchange Act”), is recorded, processed, summarized and reported within the time
      periods specified in the Securities and Exchange Commission’s rules and forms.
      Disclosure controls and procedures include, without limitation, controls and
      procedures designed to ensure at a reasonable assurance level that such
      information is accumulated and communicated to the company’s management,
      including its Chief Executive Officer and Chief Financial Officer, as
      appropriate, to allow timely decisions regarding required
      disclosure.





Management
      of the company, including the Chief Executive Officer and Chief Financial
      Officer, conducted an evaluation of the effectiveness of the company’s
      disclosure controls and procedures (as defined in the Exchange Act Rule
      13a-15(e)) as of September 30, 2006. Based upon the evaluation, the Chief
      Executive Officer and the Chief Financial Officer concluded that the company’s
      disclosure controls and procedures were not effective as of September 30, 2006,
      because of the material weaknesses in internal control over financial reporting
      related to (i) accounting for income taxes and (ii) controls over invalid
      journal entries as fully described in the company’s 2005 Form 10-K.





Management
      performed additional analysis and other post-closing procedures to provide
      reasonable assurance that the company’s Consolidated Financial Statements are
      prepared in accordance with generally accepted accounting principles.
      Accordingly, management believes that the financial statements included in
      this
      report fairly present, in all material respects, the company’s financial
      condition, results of operations and cash flows for the periods
      presented.




(b)
      Changes in Internal Control over Financial Reporting





During
      the
      first quarter of 2006, the company made changes in its internal control over
      financial reporting that materially affected or are reasonably likely to
      materially affect, the company’s internal control over financial reporting. In
      particular, the company implemented certain enhancements to its internal control
      over financial reporting related to the following material weakness described
      in
      the company’s 2005 Form 10-K:





*Controls
      over Invalid Journal Entries:* Effective
      March 2006, the company implemented a quarterly review by the Controller of
      all
      posted journal entries to ensure that no manual journal entries by unauthorized
      personnel are posted to the General Ledger. Additionally, effective February
      2006, the Controller or Senior Manager of Accounting and Reporting reviews
      every
      balance sheet reconciliation in detail per the published reconciliation
      schedule. These enhancements have not been in place for a sufficient length
      of
      time to allow management to obtain a large enough sample size to complete
      remediation testing on these controls.





During
      the
      second quarter of 2006, the company made changes in its internal control over
      financial reporting that materially affected or are reasonably likely to
      materially affect, the company’s internal control over financial reporting. In
      particular, the company implemented certain enhancements to its internal control
      over financial reporting related to the following material weakness described
      in
      the company’s 2005 Form 10-K:





*Controls
      over Accounting for Income Taxes:* Effective
      June 2006, the company retained an outside tax specialist to review, validate
      and improve the company’s tools and processes utilized to ensure compliance with
      SFAS 109, Accounting for Income Taxes. The tax specialist worked with the
      company to develop a new provision calculation model and tax balance sheet
      which
      were validated against the first quarter 2006 tax provision calculation and
      then
      utilized to generate the second and third quarter 2006 tax provision, notes
      and
      disclosures reported in the Form 10-Q for the second quarter of 2006 and herein.
      The company has retained the tax specialist to provide ongoing quarterly
      validation of all tax related financial statement line items, notes and
      disclosures. These enhancements have not been in place for a sufficient length
      of time to allow management to obtain a large enough sample size to complete
      remediation testing on these controls.





21




There
      were
      no changes in the period covered by this report that materially affected or
      are
      reasonably likely to materially affect, the company’s internal control over
      financial reporting.





During
      the
      remainder of 2006, the company expects to implement additional enhancements
      to
      its internal control over financial reporting related to controls over invalid
      journal entries and general ledger reconciliations described in the company’s
      2005 Form 10-K. Specifically, the company plans to leverage security controls
      within the ERP system to limit general ledger journal access.








22




**TASTY
      BAKING COMPANY AND SUBSIDIARIES**





**PART
      II. OTHER INFORMATION**





**Item
      1.****Legal
      Proceedings**





The
      company was the defendant in a suit which was originally commenced in November
      1998 by certain of its independent sales distributors in Common Pleas Court
      for
      Philadelphia County, Pennsylvania, in which the plaintiffs sought damages for
      (1) the alleged erroneous treatment of sales distributors as independent
      contractors by the company such that the sales distributors were required to
      pay
      taxes that they allege should have been paid by the company, and (2) for alleged
      breach of contract relating to the collection of an administrative fee from
      unincorporated sales distributors. The court dismissed with prejudice the
      plaintiffs’ first claim in March 2000 and in January, 2002 certified a class of
      approximately 200 sales distributors for the second claim. On July 31, 2006,
      the
      court granted the company’s motion for summary judgment on the second claim. On
      August 29, 2006, the plaintiffs appealed the decisions on each of the claims.
      The company believes that neither claim has any merit and will vigorously defend
      the appeal. The company has not established any reserve with respect to this
      litigation.





**Item
      1A.****Risk
      Factors**





Our 2005
      Form 10-K includes a discussion of certain risks and uncertainties
      facing us, including those risk factors that could cause our
      actual results to differ materially from those stated in forward-looking
      statements contained in this Quarterly Report on Form 10-Q.  The new risk
      factor presented below should be read in conjunction with the risk factors
      and
      information disclosed in our 2005 Form 10-K.  Solely for purposes of
      the risk factors in this Item 1A, the terms “we,” “our,” and “us” refer to
      Tasty Baking Company and its subsidiaries.





Exercise
      of Real Estate Option Could Adversely Affect our Operations


We
      entered
      into an option agreement that gives a third party the right to acquire our
      distribution center and corporate offices.  While we believe that if the
      option is exercised, we will be able to relocate our distribution center and
      corporate offices to an appropriate new facility without a material interruption
      in our business operations, however, if we are unable to do so it could have
      an
      adverse impact on our operations, sales and results of operations.








**Item
      2.****Unregistered
      Sales of Equity Securities and Use of Proceeds**





**Issuer
      Purchases of Equity Securities**





Effective
      July 28, 2006, the Board of Directors renewed the company’s stock repurchase
      program originally adopted in July 2003, and previously renewed in July 2004. Under
      the
      program, the company may acquire up to 400,000 shares of Tasty Baking Company
      common stock at purchase prices not to exceed, in the aggregate, $4, million,
      through July 28, 2008. These purchases may be commenced or suspended without
      prior notice depending on then existing business or market conditions and other
      factors. The following chart sets forth the amounts of the company’s common
      stock purchased on the open market by the company during the third quarter
      of
      fiscal 2006 under the stock repurchase plan.





Period
            (a)
                Total
              Number
                of
              Shares
              (or
                Units)
              Purchased
            (b)
                Average
              Price
                Paid
              per
                Share
              (or
                Unit)
            (c)
                Total Number of Shares
              (or
                Units) Purchased as
              Part
                of Publicly
              Announced
                Plans or
              Programs
            (d)
                Maximum Number or
              Approximate
                Dollar Value of
              Shares
                (or Units) that may yet
              be
                purchased Under the Plans
              or
                ProgramsJuly
                2 -
              August
                5
            6,256
            $
                8.45
            6,256
            370,644August
                6 -
              September
                2
            12,604
            $
                8.38
            12,604
            358,040September
                3 -
              September
                30
            -
            -
            -
            358,040Total
            18,860
            $
                8.40
            18,860
            358,040




23




**Item
      6.****Exhibits**




(a)
            Exhibits:




Exhibit
      10
      (a) - Option Agreement, dated July 2, 2006, between the Company and Keystone
      Redevelopment partners, LLC, is incorporated herein by reference to Exhibit
      10(a) to Form 8-K, filed on or about July 11, 2006.





Exhibit
      10
      (b) - Form of Change of Control Agreement between the Company and certain
      executive officers is incorporated herein by reference to Exhibit 10(b) to
      Form
      8-K, filed on or about July 31, 2006.





Exhibit
      10
      (c) - Amended and Restated Change of Control and Employment Agreement, dated
      as
      of July 27, 2006, between the Company and David S. Marberger is incorporated
      herein by reference to Exhibit 10(c) to Form 8-K, filed on or about July 31,
      2006.





Exhibit
      10
      (d) - Amended and Restated Employment Agreement, dated as of July 27, 2006,
      between the Company and Charles P. Pizzi is incorporated herein by reference
      to
      Exhibit 10(c) to Form 8-K, filed on or about July 31, 2006.





Exhibit
      10
      (e) - Amended and Restated Supplement Executive Retirement Plan Agreement,
      dated
      as of July 27, 2006, between the Company and Charles P. Pizzi is incorporated
      herein by reference to Exhibit 10(d) to Form 8-K, filed on or about July 31,
      2006.





Exhibit
      10
      (f) - Tasty Baking Company Annual Incentive Plan, dated as of July 27, 2006,
      is
      incorporated herein by reference to Exhibit 10(f) to Form 8-K, filed on or
      about
      July 31, 2006.





Exhibit
      10
      (g) - First Amendment to Credit Agreement, dated as of November 2, 2006, by
      and
      among the Company, PNC Bank, N.A. and Citizens Bank of
      Pennslyvania.





Exhibit
      31
      (a) - Certification of Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.





Exhibit
      31
      (b) - Certification of Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.





Exhibit
      32
      - Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.





24


**TASTY
      BAKING COMPANY AND SUBSIDIARIES**





**SIGNATURE**










Pursuant
      to the requirements of the Securities Exchange Act of 1934, the company has
      duly
      caused this report to be signed on its behalf by the undersigned thereunto
      duly
      authorized.








TASTY
                BAKING COMPANY(Company)November
                3, 2006
            
            /s/
                David S. Marberger(Date)
            
            DAVID
                S. MARBERGEREXECUTIVE
                VICE PRESIDENT ANDCHIEF
                FINANCIAL OFFICER(Principal
                Financial andAccounting
                Officer)




25